Credit card debt accumulates quickly, and Americans have a lot of it. At the start of 2018, the United States had $1 trillion in credit card debt, with the average American family owing $8,788. The issue isn’t just having credit card debt, even if we pay it off on time each month. When we get behind on our payments due to emergencies or unexpected purchases, our credit card debt begins to accrue interest and penalties.
These are immediately added to what we owe, and the debt quickly accumulates to the point where it becomes insurmountable. If you find yourself in this situation, refinancing credit card debt at a reduced interest rate may help you get control of your debt and make progress toward removing it entirely.
When most individuals speak about refinancing credit card debt, they’re referring to either utilizing a balance transfer credit card to pay off current debt at a reduced interest rate or taking out a reduced personal loan to pay off credit card debt, basically a credit card refinancing loan.
Other possibilities for refinancing credit card debt include home equity lines of credit and 401(k) loans.
So, which is best for you? Balance transfer credit cards have a low-interest rate or a period of no interest, enabling you to move your old high-interest credit card debt to the new card.
To qualify, you usually need a strong credit score. Once authorized, you transfer your previous high-interest credit card amount to the new card and pay it off at a reduced APR. Paying off the credit card debt should be easy if there is little to no interest for a defined period.
The second method for credit card debt refinancing works similarly. You may apply for a personal loan to pay your current credit card bill. Then, with fixed monthly payments, pay off your debt at a reduced interest rate. Some individuals opt to pay off or restructure their credit card debt using a loan from their 401(k). However, early 401(k) withdrawals are subject to significant penalties. Alternatively, you might utilize the equity as a line of credit if you own a property.
How to Use a Credit Card for Balance Transfers
Here are some facts concerning balance transfer credit cards that you should be aware of:
Balance transfer credit cards allow you to pay off your credit card debt without incurring a high APR for a limited time. These initial 0% APRs generally last six to 18 months.
The interest-free introductory period, APR rates beyond that time, transfer fees, credit limits, and perks on balance transfer credit cards vary. Most of the time, a strong credit score is required to qualify. Conduct research to determine which debt transfer credit cards are available to you and which make the most sense.
While you may transfer credit card debt from numerous cards, you cannot transfer more debt than your new balance transfer credit card’s credit limit. If you already have a lot of credit card debt, you may have debt on many cards.
After you’ve been authorized for a balance transfer card, it might take up to six weeks for the credit card issuer to contact your current debt holders and transfer the debt. Continue to make any payments due within that period if you wish to avoid late fees or penalties. Your previous credit card will have a zero balance when the debt is transferred to the new balance transfer card, but it will not be closed unless you want to cancel it.
Balance Transfer Credit Cards: Advantages and Drawbacks
When credit card debt develops, interest payments may rapidly mount up and add to what you owe, making it much more difficult to pay off. While your credit history determines your interest rate, credit card APRs typically run from 15% to 20%.
If you have debt on a high-interest credit card, it may make sense to refinance your debt using a balance transfer credit card. Getting out from under the strain of rising interest may be as easy as your first low-interest or interest-free term. However, if you cannot pay off the debt before the end of the promotional period, you may find up with another credit card payment and a skyrocketing interest rate.
The interest rate on most balance transfer credit cards increases dramatically after the promotional period. If you fail to pay, you risk losing the introductory rate. Furthermore, debt transfer credit cards incur a balance transfer fee ranging from 3% to 5%. If you’re moving a substantial amount of debt to your new card, this might quickly pile up.
Before you sign up to refinance your credit card debt with a balance transfer credit card vs. a personal loan, do the math and make sure you’ll save money and be able to pay off the credit card during the introductory 0% APR period. If you wind up with debt on the card that accrues interest after the promotional period, you may find yourself right back where you began, which may affect your credit score.
